Revoke the regulation on cost recovery!

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OGEASIA July 30 - August 30, 2011

Respected lawyer Todung Mulia Lubis of the Lubis, Santosa & Mulyana Law Office, which has been appointed to represent the Indonesian Petroleum Association (IPA) in its request for a judicial review of Government Regulation (PP) 79/2010 on cost recovery, maintained that the PP should be revoked, or some conflicting articles in the PP should be declared invalid. He explained at length about the concerns of the IPA over the new regulation in an interview with OGE Asia's Sonar Sihombing at his office at Equity Tower in the Sudirman Central Business District on July 12,2011. The interview ran as follows:

Why did the Indonesian Petroleum Association (IPA) ask for a judicial review against Government Regulation PP 79/2010?

From a legal point of view, PP 79/2010 has many articles that are against the laws that are above the regulation, such as the Law on Oil and Gas, the Law on Manpower, the Law on Human Rights, the Law on Legal Drafting, and the tax law. This means that PP 79/2010, which is of lower status, is against laws of higher status.

What is the impact of this?

Because this PP is against laws of higher status, it has the potential to create restlessness among business people in the oil and gas sector and (the potential to) cause legal uncertainty. There is restlessness and legal uncertainty because something has disturbed the contracts they have signed with the government. The legal certainty of this is disturbed.

Why? Because all oil and gas companies sign Production Sharing Contracts (PSC) with the oil and gas upstream sector regulator (now BPMIGAS, formerly state oil and gas company PT Pertamina). The PSC is a standard contract and everybody knows that it has a time frame. According to civil law, this contract is binding for the parties that sign it. Secondly, the contract applies like a law. When a contract that has been agreed upon and is binding becomes ineffective with the introduction of PP 79/2010, this is disturbing. The contract has not been respected and there is no legal certainty.

Precisely which part of PP 79/2009 is under the spotlight of the IPA?

In the judicial review motion we have submitted to the Supreme Court we proposed that 22 points be changed or revoked. Out of all of them, it is Article 38, Paragraph B that is the most disturbing. If this article did not exist, oil and gas business people who had signed contracts (the PSC) would be at peace, because this article allows the government to unilaterally change the content of the contract immediately. This is the problem. In a contract, any change should be made upon the agreement of all parties bound by the contract. It is confirmed under the law that all PSCs are effective until the end of the terms agreed in the contracts.

Does that mean that the government no longer has any right to regulate our national oil and gas industry and has to obey the contracts made in the past, even though the content of them is considered no longer suitable?

A contract can be changed if both parties agree to make the change. What should not be done is the use of force unilaterally. Therefore, if a contract's term would end in 2020, the change can only be done in 2020, after the end of the term, except if both parties agree to change the content of the contract. The government could not force a change unilaterally. This is really important, because it relates to the sanctity of contracts. If a contract is changed unilaterally, this means there is a breach of contract. If a breach of contract happens, it should be handled through an arbitration panel. Is that what we want? Future contracts can be made based on PP 79/2010. However, would investors be interested in the terms and requirements? The regulation should not be retroactive; it should be effective only for the future.

If the government insists on applying and implementing PP 79/2009, what will the main impact be?

It will have a huge impact. At the very least, it would be harmful for the state budget, because the oil and gas sector still plays quite a big role in our state budget. This means that foreign investors that are restless and do not feel comfortable will not increase their investment. They may even transfer it to other countries that give them benefits and comfort in doing their business. It will have a great impact. Our oil and gas industry will decline even further and the supporting industry would be in ruins. It has the potential to diminish our economic performance.

According to your analysis, what chances are there of winning the judicial review request?

It depends on how the government sees it. I will certainly look at how big the role of the oil and gas sector is in its contribution to our state budget. The bigger its role in the state budget, the more the government should give its attention to the request. The judicial review motion is submitted due to the restlessness of investors in the oil and gas sector. If there are no more investors coming here, or if investors who have been here do not increase their investment but move from Indonesia, the results would be devastating. There would be no increase in our oil and gas production and our national income would drop. So does the government want to increase the national income or not? That is their choice.

In your opinion, what should the government do?

The government should improve the people's welfare more and more. This requires the development of infrastructure such as roads, housing, education, and health, as expected. It also needs bigger funds. This means that investment in the oil and gas sector, which contributes much, should be increased. The government should create a conducive business climate, not one that creates restlessness, and respond immediately to the judicial review motion filed by the IPA. Or it should make laws and/or regulations that give more incentives, instead of disincentives like PP 79/2010. The government should look at the psychology of business people in the oil and gas sector. They think that PP 79/2010 creates a basic problem, so the government should respond as soon as possible. The government should also see that talking about the oil and gas sector is not merely talking about oil companies, but also the supporting industry, workers who rely on them, and many people in the informal sectors that indirectly relate to the industry, like food stalls, guesthouses, transportation services, photocopying services, and other supporting businesses.

Is there any time limit as to when the ruling on the judicial review request would be announced?

Until now there is the submission of the judicial review motion that is regulated, so (the time limit is) before 180 days after it is introduced. However, there is no regulation about how long any judicial review motion should wait before it receives a response. I think that because the oil and gas sector is very important, it would be better for the Supreme Court to give its response as soon as possible in order to create comfort for all parties bound by the contracts. The country is facing a demand to provide welfare for the people. Included in this is the provision of good infrastructure, instead of provision of just rice or money that would last only briefly. The development of infrastructure can be carried out if there are enough funds in the state budget, and most of the state budget comes from the oil and gas sector.

Have there been any impacts of PP 79/2010?

Yes! We saw it recently when the government conducted a tender for new oil fields/blocks, and almost no one was interested. They failed to attract bidders. This regulation has been discussed for more than a year. This is about cost recovery. When an oil field is producing, costs should be reimbursed. The reimbursement fund is not the government's money and it is not the businessman's, either. Therefore no one makes money here. On the other hand, if an oil field does not produce, the big risk is held by the company that brings a lot of capital and technology, so they have no legal certainty even though the investment is quite huge. Businessmen must think twice before they invest. Yes, we have already felt the impact.

If we look at the commitment of big companies like BP and Total, which will increase their investment in Indonesia by billions of dollars, does that mean that PP 79/2010 is not really a problem?

That is still a promise. The realization remains to be seen. That is a commitment. A commitment must be followed by various requirements. Article 38, Paragraph B says, "Things that have not been regulated in the contract would be regulated properly." This is hard to understand. What is meant by "have not been regulated properly"? Article 38 is all about the content of a contract. Which (of the contents of the contracts) have not been regulated and by whom? By the government or by the businessman? Or both? This article is debatable.

In your opinion, what should we do with PP 79/2010?

Ideally, this regulation should be revoked. The IPA would be grateful if conflicting articles are declared invalid. The Supreme Court has the authority only to declare that this or that article, or all points in the judicial review motion, is not valid. It would then be up to the Minister of Energy and Mineral Resources.